Markets Unwrapped: May 2025
May was a stark contrast to the previous month of volatility, as markets continued to rally and are now nearing all-time highs. Trump’s 90-day delay on the introduction of tariffs seems to have investors believe negotiations will continue to happen and murmurs of a trade war with China began to quell – if only until July. With investors being accustomed to rapid volatility off the back of news, no news saw equity markets around the world climb.
Although Australian equities still face oncoming challenges, the rally around the world also found its way to domestic shores. With the RBA cutting interest rates at the end of May, GDP data released this week being well under expectations; suggesting another decrease in July, and full impacts of the onshoring in the US not known; the recent strong performance having the ASX200 pushing for all-time highs again, indicates momentum may be fuelling equities and not the fundamentals.
The Australian 10-year government bond yield increased to 4.28% to close out May, although the RBA reduced the cash rate to 3.85%. Although the market is now almost certain of another rate cut in July, the final dew days of May actually saw the market decrease it’s probability in a cash rate cut, which allowed for the month to end in an increased yield. With equity markets still rallying despite obvious signs of caution, there is the possibility that the rotation to defensive assets could limit the impact of uncertainty and volatility that is likely to come.
US recession fears continue with the significant inflationary pressures of the tariffs continuing to suggest a much weaker US economy in the near future and the political divide that they are currently seeing across the country will likely exacerbate this. The same can be said for many parts of the developed world as economies were already in the midst of easing cash rates, and the new inflationary pressures will likely be felt coming up – as they are currently only delayed until July. Although the Chinese economy looks to still show signs of being weaker than the past 20 years, it continues to have the opposite issues of the developed world and is trying to stimulate the economy.
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